Saving for retirement? The amount you save, and when you start, is more important than which investments you select. I want to focus just on savings habits.
You probably have already read that you should “pay yourself” at least 10% (preferably 15-20% for millennials) of everything you earn. I know that can be a huge challenge unless you have a great paying job. If it is not possible to save 10%, don’t be discouraged. Start small and work up to 10% over time. The more important part is to start. The habit is much more important than the amount.
It will be far more difficult if you are in your 30s (or older) and have not yet developed good savings habits. Worse, by then you will probably need to either save much more for retirement, or simply retire much later.
Live below your means. This means preparing a household budget, tracking your expenses, and minimizing or eliminating debt. Consider making some lifestyle changes if your expenses are not low enough to have savings. Ways to do that include finding a roommate, moving closer to work (so you can bike or walk), making your own coffee, and packing your lunch. The two areas that have the greatest impact are (1) where you live and (2) how you eat. Live in a low cost city and neighborhood, and have three roommates? Chances are you are stashing away quite a bit of savings each month even at a low-paying full-time job. Eating at home most nights by doing your own cooking (no buying prepackaged food), and packing a lunch for work provides a decent chunk of change. Combine these two and you will be surprised how much you can save.
Deciding how much to save is personal and depends in part on the lifestyle you plan to have in retirement. Are you going to retire at 56, or work into your 70s? Are you married or single? Children? What amount of investment risk is right for you? These are all important questions, but what matters more when starting out is simply developing and maintaining good savings habits.
You should save enough for an emergency fund (6 months of minimal-level living expenses in liquid accounts, like I-Bonds via treasury.gov or a money market fund) and pay off high interest debt before starting to save for retirement. The emergency fund is to cover unexpected expenses or a period of unemployment. One exception to building the emergency fund is if you have an employer offering a retirement plan with a match, in which case you might consider contributing enough to get the match, and save less for the emergency fund. As you earn raises, use them to increase your savings rate and get the emergency fund in place.
A foundation built with strong savings habits and living below your means is far more important than where you invest your money. Once you have this foundation, you will be in a position to make confident investing decisions to achieve your goals.